Legal Aspects of Real Estate investments in France

Much more than the Anglo-Saxon law system, French law is predominantly based on written proof, therefore the State intervenes more in private transactions to further ensure contractual exchanges. To achieve this goal, the State delegates powers to a qualified professional such as the "Notaire" to ensure the contracts. Thus, the French Notaire authenticates the agreements. He must practice extreme caution before signing any agreement because taking a contract to court is rare.

A direct consequence of the Notaire institution in the French legal system is the lack of litigations concerning agreements performed by Notaires. In the United States, a report from the President's council on competitiveness, dated August 1991, shows that contractual litigations have increased (+21.6%) as well as Real Estate litigations (+44.2%) costing 300 billion U.S. $ to the country. This situation is leading the U.S. Government to consider creating a new type of legal professional such as the French Notaire in order to strengthen the contractual relationships required by the economic market.

Consequently, the Notaire shall reassure foreign citizens or companies of the legal soundness of their French investment.

As many legal queries will occur during a Real Estate investment in France,

The Notaire's Duties
The Real Estate Purchase Proceedings
The Documents Securing a Transaction
The joint-ownership notion
Tax Aspects of the Investment
The Language and Jurisdiction of the Contract

1. The Notaire's duties

Three questions will be explained:

(a) Who is the Notaire?
(b) How are the contracts secured?
(c) How much are the Notaire's fees?

(a) Who is the Notaire?

As seven years of law are necessary to graduate, the Notaire is the most qualified professional of the French legal system. The Notaire is both a Public Official and counsel. His qualifications allow him to efficiently advise his clients in specific areas of law such as Real Estate Law, Family Law and Corporate Law.

He is able to counsel clients on matters all over France without any restrictions. A Notaire from Paris can hence equally deal with an acquisition of a house on the French Riviera as well as supervise the purchase of a supermarket in Strasbourg or control an industrial plant in Northern France.

The French State confers to the Notaire an authentic power to legalize certain agreements such as Real Estate sales which cannot be enforced by any other means. This monopoly prevents almost any subsequent litigation concerning these contracts. However, the Notaire does not only draft and authenticate deeds. As today's legal transactions are more and more complex, counselling clients is also a major function of a modern Notaire.

(b) How are the Contracts Secured?

The Notaire is deemed a Public Official with powers delegated by the State to authenticate the deeds he drafts and provide complete security to the contracts he supervises.

The authenticity of the deeds grants them an undisputable date and content in Court. The law imposes a personal liability on the Notaire for his professional acts which is more extensive than that of any other branch of the legal profession. Not only would the professional mistake be penalized immediately by a judge, but it would also mean that all of the Notaires would be held liable as they have a common insurance, providing an immediate financial guarantee to the client. The American investor is therefore facing a specialized lawyer fully liable for his deeds.

The Real Estate Registration system in France is highly efficient. It takes two months for a sale to be registered, and only the authentic deeds settled by the Notaire can be registered. The content of the deeds are controlled by both the Notaire and the Registration Authority. On one hand this procedure might seem long compared to an immediate transaction occuring in some other countries, but on the other hand it results in a lack of litigation concerning these agreements (0.5% per year on Real Estate transactions). Thus the Notaire has the task to both completely satisfy his clients and to impose some limits to their queries according to his Public Official status.

The fees concerning the contracts performed by a Notaire are fixed by Law. Neither the Notaire nor the clients may modify these specific fees. For instance the fees for a purchase of an apartment in Paris totals 0.825% of the price plus V.A.T. (19.6%). American and British clients undertaking a Real Estate transaction in France should be aware that if there are two Notaires, the fees are shared, therefore, retaining their own Notaire will not increase the professional fees, which are then shared by the two Notaires supervising the contract.

Concerning all the other deeds and the counsel fees, both are freely fixed with the client, as they are by American lawyers.

2. The Real Estate Purchase Proceedings

An American or British company wishing to buy land to construct a building for apartments, offices, or shops will follow the same procedure as an American or British private individual purchasing a house. First, the investor has to find the Real Estate to buy. Many professional Real Estate offices exist in France, and some of them do have international skills, allowing them to deal with American clients. Some Notaires also have a Real Estate department, and might be able to be of assistance in finding a property. Once the Real Estate has been found, completing the purchase involves the following steps:

(a) the Promise of Sale;
(b) the Final Sales Agreement.

(a) The Promise of Sale

This step is the most important one, as all the legal aspects of the sales agreement are fixed at the time. At this stage of the contract, the Law does not stipulate that the deed be authentic, meaning it does not need to be supervised by a Notaire. A Lawyer or a Real Estate agent may thus sign a Promise of Sale. However, this mistake is not to be made by American investors, for only a Notaire is qualified to counsel the clients and prepare contracts at no extra-cost. This is true not only from a legal stand point, but also from a Tax stand point. Many promises result in litigation because the clients are genuinely not aware of the consequences of the deed they have signed.

Once the Promise of Sale is signed, the commitments of the parties to a contract are final and may not be modified. It is at this stage of a Real Estate purchase that the Notaire's advice is most useful for the client because all future obligations of the parties rely on the Promise of Sale.

Many forms of contracts could be signed before closing the final sales agreement. But only the Notaires use the Promise of Sale which is the most secure form. The buyer usually places a deposit of 10% of the property price in the hands of the Notaire. This security deposit guarantees the buyer's commitment. If the buyer cannot purchase or does not wish to continue with the purchase anymore, he loses the 10% he has paid which is then given to the seller.

The buyer pays the remaining 90% of the property price on the day of the final purchase. Signing a Promise of Sale with a Notaire provides another advantage to the buyer if the purchaser happens to die during the proceedings, an insurance contracted by the Notaires will enable his heirs to finalize the purchase or lose the safety deposit, up to 75,000 Euros under specific conditions.

For the above mentioned reasons, it is very important for foreign investors to rely on a Notaire at the beginning of the transaction. If the chosen Notaire has international skills and often deals with American or English clients, he will be able to send them to Real Estate agents with files in English.
Moreover, consulting a Notaire before the transaction may be very useful as Notaires often have Real Estate at interesting prices within their files.

(b) The Final Sales agreement

Once the Promise of Sale has been signed, all the commitments of the parties are fixed. The Notaire must then collect various documents, such as property titles and mortgage documents to verify that all the paper work is in order. Collecting the documents and verifying them may take up to three months. This delay may be shorter, but it may still seem long to many American or English investors. This time period is extremely important because it serves as insurance for the Final Sales Agreement.

After the Notaire has collected all the documents, the Final Sales Agreement is signed. It is an authentic contract and is almost undisputable in court. Litigations on such contracts are very rare, unlike litigations concerning contracts not prepared by a Notaire.

3. The Documents Securing a Transaction

The most relevant points for a Notaire to verify during a transaction are the following:

(a) the entitlement of the parties;
(b) the mortgage situation;
(c) the Town-planning; and
(d) the property verification.

(a) The Entitlement of the Parties

The Notaire is liable for examining the identity and the entitlement of all the parties involved in the contract. He would, for instance, be liable in the case of a non-binding act of sale if one of the parties is incapable. The Notaire verifies the capacity of the parties by requesting a legal copy of both birth and marriage certificates from City Hall.

Unlike other European Union countries such as Italy or Greece, there are no restrictions for a foreign citizen to buy Real Estate in France, according to article 11 of the French Civil Code.

(b) The Mortgage Situation

A Notaire cannot give the price of a transaction to the seller until he has checked the mortgage situation of the Real Estate to be sold. Upon the Notaire's request, the Mortgage Registry delivers a document detailing the complete mortgage situation of the Estate. If any creditor secured by mortgage is recorded, the Notaire is liable for paying him with the price of the transaction before giving the balance to the seller.

This document is valid for two months after its delivery and binds the liability of the Mortgage Administration. The delivery of this document may take up to two months. Because of this kind of delay, Real Estate sales in France may take up to three months. Nevertheless, it permits the transaction to be secured, by the combination of the liabilities of both the Notaire and the Mortgage Registry Services.

The Notaire must check the applicable Town-planning regulations on the Real Estate to be sold, and inform the buyer of the consequences of these regulations. He requests from a surveyor a complete report which he then encloses in the final sales agreement.

Among the rules to be verified, the Notaire may, for instance, verify that there is no easement on a piece of the property. The surveyor is liable for the content of the delivered document while the Notaire is liable for controlling and reporting it to the buyer. In addition to the mortgage document, the delivery of the above-mentioned document requires a certain delay. Still, it provides the guarantee of a secured transaction.

If the buyer wishes to build or to change the use of the building (for instance, buying a shop to transform it into an apartment), a building permit is necessary and its delivery may take up to six months. The investor will then be fully counselled by the Notaire on matters such as delivery proceedings and how to link the permit with the Real Estate contract.

(d) The Property Verification

The Notaire must verify the property title. He must search up to thirty years before the transfer of title which is the limitation period for all Real Estate transactions to be brought to court.
The Notaires must also keep their deeds for one hundred years after their execution.

The property verification is essential to prevent any type of litigation, and particularly when the assets have been acquired through a deceased Estate.

The above-mentioned examinations by the Notaire are the predominant ones. However, others such as clearing preemptive rights or balancing the account with the co-owner's manager do exist. Generally three months are necessary for all the examinations and allow any buyer to be fully secured during the transfer of title.

4. The joint-ownership notion

This notion might be relevant for both the English or American individual buying an apartment and for the English or American invesment companies buying a whole building in order to sell apartments or offices.

All the joint-ownership buildings in France are duly subject to a law dated July 10, 1965. Consequences of joint-ownership are various. A joint owner benefits exclusively from his apartment, which is a private share. However, the main walls, the floor and the ceiling are the property of all the owners, jointly. Therefore, all the decisions regarding the commonly owned property must be taken by the owners during the joint-owners' meetings. Even within his own apartment, an owner has to obtain authorization from the others to proceed with particular modifications.

Even a separate house may happen to be in joint-ownership with another one. This occurs when the piece of land is too small according to the urban regulations to be constructed on and requires the piece of land adjoining it to be constructed upon as well. The outcome of joint-ownership are multivarious and require on-going counsel from the Notaire.

5. Tax aspects of the investment

The three following Tax aspects are to be explained:

(a) the cost of a Real Estate purchase;
(b) the cost of a Real Estate ownership; and
(c) the specific aspects concerning non-resident investments.

(a) The Cost of a Real Estate Purchase

Registration taxes must be paid to the State upon each transfer of title in France. These taxes are collected by the Notaires and refunded to the State.

There are two Tax status concerning Real Estate transfers in France, depending on whether the Real Estate has been built more than five years ago or less than five years ago:

i) the V.A.T. status, which concerns new buildings;
ii) the registration tax status, which concerns buildings completed more than five years ago.

(i) The V.A.T. status

When an uncompleted building, a new building or a building completed less than five years ago is sold, the Tax status to be applied is the Real Estate V.A.T., at a rate of 19.6%. The expressed price in the deed of sale always includes tax. The real price is actually the tax non-included price, to which the seller adds the V.A.T. to reach the final price.

The above-mentioned tax status directly concerns French or foreign construction companies. Because V.A.T. is paid only once for the same product, the companies have a tax credit that is repaid upon the sale of the building. The Real Estate V.A.T. is one of the most complex aspects of the French Tax system and requires a professional such as the Notaire to safely advise investors.

An American or an English company is entitled to build Real Estate for the purpose of sale if a specific company is created that will dissolve after the last apartment or shop has been sold. The investor's Notaire counsels the company on each specific operation and draws up the corporate charter.

The seller is always the V.A.T. subject, except when it is the buyer who assigns the transaction to V.A.T. For instance, this is what happens when the building to be sold is an old one, and when the buyer intends to rebuild it within four years. In this particular case, the price is the former one to which V.A.T. is added, always at the rate of 19.6%. This last example is given only to a professional buyer since a private buyer is exempted from paying V.A.T. in this case since 1998.

(ii) The Registration Taxes Status

All the transactions concerning Real Estate completed more than five years ago are subject to the Registration Taxes status. The Tax amount changes according to the area of taxation, because of local taxes. It also used to vary according to the destination of the Real Estate to be sold; the tax status for apartments was less expensive than for shops or offices.

Commercial Real Estate transfers were subject to tax at a rate of 18.6%. Since 1999, all transactions are subject to the same tax of 4,89%.

(b) The Cost of Real Estate Ownership

Being a Real Estate owner in France requires the annual payment of several taxes. The Real Estate Tax is the most important one and has to be paid by all owners, whether they are private individuals or companies. The amount is calculated according to the total surface of the ownership.

The Residential Tax is to be paid by the inhabitants of the buildings. The amount is determined according to the inhabitable surface. This tax is local and thus differs from one area to another. In some areas of France, it may be more expensive than the Real Estate Tax, as it may be the only local tax resource for the municipality.

The Professional Tax is paid only by companies. Several criteria are necessary for calculation, such as the revenue and the number of people employed by the company.

The following points are to be explained :
i) the currency of the contract ;
ii) the non-resident accounts in France ;
ie) French and foreign loans ; and
iie) non-resident capital gains.

i) The Currency of the Contract

As French Law considers that paying for Real Estate with foreign currencies requires a flowing back which is obviously impossible with buildings, the Real Estate price purchased by non-residents must thus be paid in French Francs. This payment, however, can take many forms, such as a cashier's check or a money transfer. This obligation leads foreign investors to open accounts in France.

ii) Non-Resident Accounts in France

This account must be opened by English or American investors with a bank in France. According to the freedom of exchange principle, private individuals may freely exchange capital. The American investor must thus only open an account only within an enabled bank such as the "Banque de France". The account may be supplied by very simple recordings such as international money transfers from bank to bank.

On the day of the Real Estate purchase, the foreign investor pays the price with a cashier's check. This check is given to the Notaire, and thus the entire price transits within the Notaire's accounting. This ensures the transaction because the Notaire may thereby pay any recorded creditor before refunding the balance to the seller. These proceedings ensure the purchaser's acquisition since the Real Estate is guaranteed to be transferred without any creditor remaining recorded.

ie) French and Foreign Loans

An American or an English investor may need a loan to pay for his/her French Real Estate purchase. The loan contract may be granted either by a French bank or by a foreign one.

Many guarantees may secure a loan contract. The Notaire counsels investors on the least expensive security and he advises the bank as to the most appropriate guarantee for each specific transaction.

Any Real Estate security must be drafted by a Notaire in an authentic agreement. The most frequent one is the mortgage.

iie) Non-Resident Capital Gains

Any capital gain carried out within a Real Estate sale is subject to tax. As the American investor is a non-resident, he must obtain a banking accreditation before the final sales agreement. This ensures the payment of the capital gain to the Tax services.

If a given transaction does not generate any capital gain, an exemption may be required from the Tax services. Unlike the resident's capital gain, the non-resident's one is paid by tax with-holding exempting him from all future taxation at a rate of 33,33%.

The Notaire may also advise investors for all proceedings, tax filing rules, and rates of the Capital Gain Tax, as he may execute tax filing rules for his clients.

6. The Language and Jurisdiction of the Contract

(a) The Language of the Contract

The French State provides that the use of the French language is compulsory in any French written agreement (main provision of a French law enacted on December 31, 1975 as modified by a law dated August 4, 1994 ("loi Toubon"). Consequently, all Real Estate sales must be drafted in French.

Moreover, French Courts have decided that the use of a foreign language in French deeds is illegal.

Some Notaires with international practice may nevertheless translate the agreements for their clients, having written translation of all of the contracts they supervise.

(b) The Jurisdiction of the Contracts

Most of the contracts are signed in France by all of the relevant parties to the Real Estate purchase.

Nevertheless, the French binding contracts do not necessarily need to be signed in France. They must be published in France for their legal enforcement, but a Notaire may either send the contract to the United States or to Great Britain to be signed. The Notaire may also choose to travel to the United States or to Great Britain to sign the contract with his clients.

Source: French American Chamber of Commerce
Prepared by Stéphane ZECEVIC, Notaire